BankThink

The FDIC should take a deliberate, phased approach to reform

FDIC
The acting chairman of the agency has laid out an ambitious agenda for revamping regulations and encouraging innovation, but there are dangers in trying to do too much, too soon, counsels David Schwartz, of the Financial and International Business Association.
Nathan Howard/Bloomberg

The financial industry stands at a pivotal moment. Regulatory shifts are being proposed, technologies are evolving at breakneck speed and the threat of financial crime looms larger than ever. In this complex landscape, the role of regulators, such as the FDIC, is critical — not only to enforce compliance but also to inspire confidence and stability in an ever-changing environment.

Acting FDIC Chairman Travis Hill recently outlined an ambitious set of priorities for the agency. These include a wholesale review of regulations, an open-minded approach to innovation and a reassessment of merger approvals, among others. While the vision presented is commendable, the practicality of executing these priorities raises important questions.

The scope of the acting chairman's agenda is both impressive and daunting. A full-scale review of regulations and manuals to better align with economic growth is a welcome goal but could easily stall under the weight of bureaucracy. Balancing safety and soundness with economic dynamism is no small feat, particularly in an industry still grappling with the aftershocks of past financial crises.

Take, for example, the push to modernize the Bank Secrecy Act. While this is a much-needed step forward, its successful implementation will require extensive coordination between financial institutions, regulators and enforcement agencies. The proposal to study deposit behavior and reevaluate disclosure practices adds another layer of complexity, especially given the diverse range of stakeholders and data involved.

The FDIC's efforts to strengthen its preparedness for resolving large financial institutions are commendable. However, the 2023 bank failures serve as a stark reminder of the complexities and challenges involved in implementing such strategies swiftly and effectively in real-world crises.

Chairman Hill's open stance on innovation and technology adoption is another area where ambition meets potential friction. While fintech partnerships and digital assets hold transformative promise, their integration into the financial ecosystem remains fraught with regulatory uncertainty and operational hurdles.

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The rise of artificial intelligence, blockchain and other disruptive technologies has outpaced regulatory frameworks, leaving gaps that bad actors are quick to exploit. The FDIC's role in fostering innovation while mitigating risk will require a level of agility and foresight that historically has been difficult to achieve.

While the priorities outlined by Chairman Hill are encouraging in theory, the risk lies in spreading efforts too thin. Each initiative — be it fostering more de novo activity, pursuing internal efficiencies or improving the bank merger process — requires significant resources and coordination. Without a focused and phased approach, the FDIC risks creating gaps in oversight or delays in implementation that could undermine the very goals it seeks to achieve.

Moreover, the call for reevaluating the supervisory process and appeals mechanisms is critical. But here too, the challenge lies in balancing streamlined processes with maintaining the rigorous standards required to safeguard the financial system.

In this complex environment, collaboration remains the cornerstone of progress. Regulators, financial institutions and industry groups must work together to address these challenges in a manner that is both pragmatic and forward-looking.

As we look to the future, I urge regulators and industry leaders alike to approach these priorities with both ambition and pragmatism. By focusing on measurable progress and fostering open communication, we can build a more resilient and transparent financial system — one that thrives on innovation without compromising its integrity.

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Regulation and compliance Politics and policy FDIC
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